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Morgan Stanley CEO says he's considering all options, including a deal with Wachovia.

Wachovia shares rose a whopping 59 percent Thursday, the day after news surfaced that the Charlotte bank could merge with the Morgan Stanley investment firm in New York. Shares of Morgan Stanley rose nearly 4 percent, after a painful selloff the day before.

The revival came as U.S. stocks rallied the most in six years on prospects the government will formulate a “permanent” plan to shore up financial markets, while regulators and pension funds took steps to curb bets against banks and brokerages.

Thursday morning, Morgan Stanley chief executive John Mack told employees the 73-year-old firm is “exploring all options,” including staying independent, according to people who attended the quarterly town hall meeting. Mack said in the meeting that he had fielded a call from Wachovia.

Morgan Stanley's top management prefers to sell a stake of up to 49 percent to the China Investment Corp. wealth fund, the Financial Times reported Thursday evening.

Earlier, the Wall Street Journal, citing a person familiar with the matter, said Morgan Stanley continued to talk to Wachovia about a possible deal, though the Charlotte bank's troubled mortgage portfolio was leading Morgan Stanley to look at a good-bank/bad-bank structure as part of a deal.

Opacity was the rule on Wall Street and in Charlotte, as shareholders, analysts and employees wondered who would be the buyer, who would benefit, and whether a deal would go through at all.

Spokeswomen at Morgan Stanley and Wachovia declined to comment.

It's also unclear what such a transaction would mean for Charlotte. At a meeting of financial officers from Charlotte-area companies Thursday night, some were curious how the two companies could pair up. But if they do, they said, and if Wachovia is the acquiring company, Charlotte could benefit.

“If it strengthens Wachovia at all, that's good for us,” said Bill Parmelee, chief financial officer for National Gypsum.

Wachovia, the country's No. 4 bank by assets, has been struggling with big losses in its mortgage portfolio after buying mortgage lender Golden West in 2006 for $24 billion. CEO Bob Steel was brought to the bank in July, to help turn the company around. On his first full day, he subtly deflected speculation that he was brought in only to patch up the bank so it could be sold.

“We're going to make Wachovia great, and that's the plan,” Steel said.

On Monday, he said in a TV interview that Wachovia has “a great future as an independent company. But we're a public company, so we're going to do what's right for shareholders,” he added.

A source familiar with Wachovia chairman Lanty Smith said he believes his top priority has been to keep the company independent. But with the recent market situation, the board has an obligation to at least look at a franchise like Morgan Stanley and its current valuation, the source said.

With the nation mired in a historic credit crisis, some analysts are predicting the end of independent investment banks. They rely on risky but potentially lucrative ventures such as trading and underwriting stocks, while commercial banks make most of their money from traditional banking services, which can be less profitable but more stable. Only two major investment firms - Morgan Stanley and Goldman Sachs - have survived the current market turmoil, following the fall of Bear Stearns and Lehman Brothers, and the purchase of Merrill Lynch by Bank of America.

Steven Mann, a finance professor at the University of South Carolina, said Morgan Stanley has “weathered the credit crisis pretty well, but I think people have lost a lot of confidence in the ability of an investment bank.” Morgan Stanley “is getting painted with the same brush” as Bear Stearns and Lehman. “It's guilt by association.”

Banking analyst Nancy Bush said she didn't think Wachovia or Morgan Stanley would benefit from a merger. Wachovia already has a large brokerage unit that includes 15,000 financial advisers, making it a top player in line with Citigroup. And Morgan Stanley, while it may be attracted to the liquidity that Wachovia could provide, could borrow from the Federal Reserve if it needed cash, Bush said. Wachovia's size makes it unlikely that any other bank would want to buy it, she added.

“I don't see that there's any scenario for them right now, other than sitting there and working out their problems,” Bush said. “They've got a black hole there with Golden West.”

Tim Vorick, a Florida shareholder who has been a vocal critic of Thompson and the Golden West purchase, said he thinks that any kind of deal with Morgan Stanley could be beneficial - but only if it's at the right price and properly managed.

“I do feel a little more comfortable with Robert Steel at the bank,” said Vorick, a retired businessman. “I don't believe that he is a loose cannon like Ken Thompson was. Mr. Thompson just got on an ego trip like a lot of these big boys do, and the shareholders suffered.”

In an earnings call Tuesday, Morgan Stanley's chief financial officer, Colm Kelleher, said the company believes in its diverse and adaptable business model. But, when it comes to commercial banks, he said, “depository institutions do not necessarily better enable us to execute our business and in fact may bring with them their own set of complications.”

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